Attention Must Be Paid: The Big (Structural) Jobs Question

It’s the increase in employment over each business cycle since the 1940s.

[Source: BLS Establishment Survey. I used annual data and chose peak years to avoid recessionary effects; the exception is 2007-2010 to show the impact of the Great Recession.]

In every decade/cycle since the 1950s, employment grew by roughly 20-30%. Except the last cycle, 2000-07, when it increased by a measly 4%, to be followed, of course, by the large losses of the last recession, the effects of which are still with us.

One thing you see here—and it’s the same thing you see when you look at the middle-class income data—is that the recession is really a problem on top of a problem. Previous cycles gave households a perch to fall from in the downturn that ended the cycle. In the 2000s, most working families didn’t climb much of a growth hill at all, so there wasn’t much to cushion the fall.

But the main thing I hear from audiences when I show this graph is the same thing I think about when I look at it and, I suspect, the question you’re asking yourself right now: why?

No one knows what the future of job growth holds, but it is absolutely legitimate to worry that the pace of growth in the 2000s expansion is the new normal. Here are some hypotheses for the lousy job growth of the last cycle:

—fast productivity growth: productivity did grow quickly, 2000-07, relative to previous decades, about 2.5%/yr, but the efficiency acceleration began in the 1990s, when job growth was strong. The difference here is demand—GDP growth was uniquely weak in the 2000s. But this is pretty circular logic—you can approximate GDP growth by adding productivity and job growth, so no new info here. You have to explain why demand was weak in the 2000s.

—lousy policy: regressive tax changes, the wars, asset bubbles, ignoring big imbalances (trade, budget and household budget deficits) surely played a role, but none of this is simple correlation: bubbles often generate growth until they pop (i.e., the dot.com bubble is implicated in the 1990s bar above), and military spending, as Krugman points out this AM, is stimulative too.

—allocative inefficiency: largely a theory at this point, but I think this one probably has explanatory legs. By pouring so many productive resources into financial innovating and engineering as opposed to that of other sectors, too much economic activity amounted to finding and exploiting tiny inefficiencies (e.g., gaining an arbitrage pricing advantage in a flash trade) and regulatory failures (subprime, rating agencies, bad underwriting). And that stuff just doesn’t provide enough economic opportunity for the broad middle.

—technology: yes, it’s been with us forever, and there’s a long history of economists worrying that labor-saving technology gains would wipe out jobs for humans. But some economic analysis and some of what I hear from people in the tech field suggest this one may have explanatory legs too. This piece reviews a new book on the issue by Brynjolfsson and McAfee (seems like author #2 could spare a vowel for author #1). It’s a short read and worth the effort—again, history is littered with predictions that we’re losing the race with the machines, but the fact is they’re getting a lot faster.

—inequality, bargaining clout, a weaker middle class: A bit circular here too, but I’ll bet this is important. My theory is that recoveries that leave out the middle class are less robust, shorter, more vulnerable to credit bubbles, and just generally weak.

More to come on this—it’s one of the most important structural questions in economics.

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7 comments in reply to "Attention Must Be Paid: The Big (Structural) Jobs Question"

Allocative inefficiency is a self-reinforcing black hole. The whole basis of PE investment strategies for “unlocking” value in corporations is that cash on hand is better than long term revenue – and I don’t see how any economy can survive that kind of looter mentality.

are you going to take a stab at explaining what is going on or wait until you hear from others? And who do you think has the forward for correction? The Third Way think tank or the more old school liberal school place? Since on the center-left that is where we are in terms of suggestions in the blogosphere. Thanks.

Thank you for paying attention. Such growth as we’ve had over the past two decades has owed entirely too much to asset bubbles and financial manipulation. Here are a three more suggestions.

1. Walmartization. Henry Ford is alleged to have paid his employees well so they could afford to buy cars. The Waltons pay their employees a pittance so they can afford to shop nowhere but Walmart. This is not a limited phenomenon in America. Minimum wage — no benefits — dollar stores — becoming the norm.

2. Productivity capture. Futurists in the late 60s and 70s predicted that productivity gains would lead to a 21st Century America beleaguered by an excess of leisure time and distributed wealth. They were right about the productivity gains, wrong about who would benefit. Productivity gains have been captured by the very wealthy, while working Americans work longer hours for lower wages. One might want to consider this when thinking about the structural causes of decreased demand, lackluster job growth.

3. Off-shoring. Production is sent overseas. Profits are sent overseas as investment in production overseas.

Where’s the demand, where are the jobs? Well, as the result of private and public decisions made over several decades, the American economy is being gutted, jobs sent overseas, wages driven down, returns pipelined to the top. This big structural jobs question doesn’t look all that mysterious from down here in the trenches.

The percentage of income going to those with with a low marginal propensity to consume would explain most of it according to Keynes. We need to add this to the chart. If we fail to redistribute the gains, they will concentrate at the top; technologically driven productivity gains just exacerbate the usual effects. If we get redistribution right, we should be able to gain from productivity increases without the drags from wealth and income concentration.

Jared, thanks for the chart. I’d like to reproduce it to study it further and I was just curious what you mean when you “chose peak years to avoid recessionary effects”? Do you mean the edges of your decades were jittered to coincide with recession?